NEW YORK (BBH FX Strategy) - European markets turned defensive this morning after a rally in Asia amid signs of ongoing divisions in Europe. Eurozone policy makers have made some progress on the way to a comprehensive crisis plan for Europe but there are still a lot of open questions ahead of Wednesday's second summit, where officials have pledged to present a final solution.As a result, European stocks have given up most of their early session gains and the dollar made up ground after the EUR, GBP and dollar bloc currencies failed to break through multi-week highs. EZ manufacturing purchasing managers' index remained soft, highlighting growth risks ahead. In Asia, the market took encouragement from a rebound in China flash manufacturing PMI, while Japanese exports also improved as Japan move back into surplus.
On the data front, we get German consumer confidence and CPI data, along with third quarter GDP from the U.S. Italy, which will be important to watch due to the recent run up in bond yields, publishes consumer confidence as well and retail sales. In addition, Italy will try to issue 5 to 6 billion euros in bonds on Thursday and Friday, possibly the first real test of market confidence after this week's summit. Beyond this there are a host of central bank meetings this week in Sweden, New Zealand and Canada, although all of these banks are expected to remain on hold. The Bank of Canada in particular is likely to be supportive of CAD, given our expectations the bank will reaffirm its Q3 growth outlook.